Does fairness breed efficiency? Pay gap and firm productivity in China

Yunhao Dai, Dongmin Kong and Jin Xu

International Review of Economics & Finance, 2017, vol. 48, issue C, 406-422

Abstract: The pay gap (PG) between executives and employees has received considerable attention. PG may incentivize employees to work hard for promotions; alternately, it may also lead to inequity aversion and decrease employees’ work effort. We examine these two competing theories about the effects of PGs on firm productivity. By incorporating incentive and inequity aversion hypotheses into one model, we find that productivity is an inverted-U function of PG. Supporting evidence is provided using wage expenses of listed firms in China. To establish causality, policy shocks are introduced. We further show that outside job opportunities and employees’ skills significantly moderate the inverted-U relationship.

Keywords: Pay gap; Productivity; Executive compensation; Wages; China (search for similar items in EconPapers)
JEL-codes: D31 J24 J31 J33 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:48:y:2017:i:c:p:406-422

DOI: 10.1016/j.iref.2017.01.003

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